US Court Rules Lido DAO is a General Partnership under State Law
The US District Court for the Northern District of California has classified Lido DAO as a "general partnership" under state law. The court found that Lido DAO operates as a partnership, where members share responsibility for actions and profits, countering the organization’s claim of being a non-legal entity.
Andrew Samuels filed a lawsuit in December after suffering losses from a decline in the value of LDO tokens purchased on the Gemini exchange in April and May 2023. He alleged that the tokens were unregistered securities and sought to hold Lido DAO accountable for their depreciation.
The court recognized the seriousness of Samuels' claims, ruling that Lido DAO, despite its decentralized nature, must comply with regulatory requirements applicable to financial entities. Additionally, the court stated that Lido DAO's indirect sale of governance tokens (LDO) does not exempt it from legal liability.
Court Questions Decentralization Claims and Investor Roles
Samuels’ legal team contended that Lido DAO, while publicly promoting decentralization, is actually centralized, with 64% of its tokens controlled by founders and early investors.
The case also implicated Paradigm, Andreessen Horowitz's a16z, and Dragonfly Digital Management as potential general partners, suggesting they may have participated in Lido DAO's governance, thus potentially making them liable. Conversely, Robot Ventures was not held responsible due to lack of evidence regarding its involvement in Lido DAO’s operations.
Implications for DAOs and Crypto Industry Accountability
In response to the ruling, Miles Jennings, General Counsel at a16z Crypto, expressed dissatisfaction, stating that the judgment undermines decentralized governance. He noted that even minimal participation in a DAO could expose members to legal liability under general partnership laws.
“Today, a California judge dealt a huge blow to decentralized governance. Under the ruling, any DAO participation (even posting in a forum) could be sufficient to hold DAO members liable for the actions of other members under general partnership laws. It’s time to DUNA.”
Judge Vince Chhabria raised concerns about whether individuals in the cryptocurrency sector can evade legal accountability through unconventional legal structures while profiting from innovative financial instruments. He highlighted the ongoing tension between the crypto industry and traditional legal principles, indicating that these issues require resolution within an evolving regulatory framework.